The German-Jordanian University Schools of Managerial Sciences

Principles of Macroeconomics
Ch.6: Measuring National Output and National Income

Summary

Dr. Ihab Magableh

Director, Consultations and Training Center Head, Department of managerial Sciencs

2010/2011

Ch.6: Measuring National Output and National Income

Explanations:
National income and product accounts describe the components of national income in the economy and help us to understand how economy does work. Product accounts provide data about the performance of the economy. They also provide a conceptual framework that macroeconomists use to think about how the different parts of the economy fit together.

I. Gross Domestic Product (GDP)

Gross Domestic (Product ( GDP Final Goods and Services Intermediate Goods Value Added : is the total market value of FINAL GOODS AND SERVICES produced by factors of production located WITHIN a country during a period of time (usually one year)? : are goods and services produced for FINAL use. : are goods that are produced by one firm for use in further processing in another firm. : the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.

Notes:
When we calculate GDP, we can sum up the value added at each stage of production or we take the value of the final goods. BUT we cannot take the value of total sales to measure the output produces. GDP = the value of Final Sales, but not the value of Total Sales simply because some sales could be intermediate goods. Used goods (old), intermediate goods, output of a Jordanian factory in Syria, are excluded from GDP in Jordan. GDP ignores all transactions in which money or goods change hands but no new goods are produced.

Examples:
Profits from the stocks or bonds markets are excluded. A fees to a broker for selling a stock of mine to someone else are included. A commission paid to an agent for selling an old house are included.

What is the different between GDP and GNP?

2

Gross National (Product (GNP

: is the total value of all final goods and services produced by factors of production OWNED BY A COUNTRYS CITIZENS during a specific period of time regardless the location of these factors.

II. GDP Calculating Approaches

Expenditure .1 Approach : a method of computing GDP that measures the amount spent on all final goods and services during a period of time. GDP is:

GDP= C + I + G + (EX-IM)
1. Personal Consumption Expenditures (C): total expenditures by households (consumers) on final goods and services. consumers spend to buy: Durable Goods : goods last relatively long time. i.e.: cars, furniture. Nondurable Goods: goods used quickly. i.e.: food, clothing. Services : the things we buy that do not involve the production of physical things

2. Gross Private Domestic Investment (I): total investment in capital that is the purchase of new housing, plants, equipments, and inventory by the private or the nongovernment sectors. This includes: Residential investment: expenditures by households and firms on new houses and apartment buildings Nonresidential investment: expenditures by firms for machines, tools, plants Change in inventories: the amount by which firm's inventories change during a period of time.

GDP = Final Sales + in Business Inventories

Gross Investment Depreciation Net Investment : is the total value of residential, nonresidential investments, and inventory purchased in a given period : is the reduction of the assets value in a given period. : Gross Investment Depreciation

3. Government Expenditures on Consumption and Investment (G): Are the total expenditures by the government for goods and services. Examples: salaries, roads, public education. Government consumption and government investment. Any other payments such as subsidies, transfer payment, and interests on debt are not counted. 4. Net Export (EX IM):
3

 Exports (EX): are the total sales of goods and services to foreigners Imports (IM): are the total purchases of goods and services from foreigners. Income .2 Approach : a method of computing GDP that measures the income wages, rents, interest, profits- received by all factors of production in producing final goods. It looks at GDP as who receives it NOT who Purchases it.

According to the income approach:

GDP = National income + Depreciation + (Indirect Taxes Subsidies) + Net factor income to the rest of the world + others.
National Income: is the total income earned by the factors of production owned by a country's citizens. National income Compensation of employees : wages, salaries, employer contribution to social insurance and pension funds, and other supplements paid by firms or government) + Proprietors income : income of unincorporated businesses or private businesses + Corporate profits: income of corporate businesses + Net interest: that paid by business + Rental income: the income received by property owners in the form of rent. 1. 2. Depreciation: capital assets value declines when they wear out or become obsolete. (Indirect Taxes Subsidies): Indirect Taxes subsidies : Taxes like sales taxes, customs and license fees. : Payments made by the government for which it receives NO goods and services.

3. Net Factor (payment) to the rest of the world = Payments of factor income to the rest of the world The receipts of factor income from the rest of the world. Net Factor Receipts (Income) = Receipts (income) Payments Net Factor Payment = Payments Receipts 4. Other: is an income that not included in any of the above.

III. Output calculations: from GDP to DPI GNP = GDP + Net Factor Income (NFI) NNP = GNP Depreciation
4

NI PI

= NNP - [Indirect taxes Subsidies + Other] = NI - [Corporate Profits Dividends] - [Social Insurance Payments] + [(Personal) Interest Income Received From The Government and Households] + [Transfer Payments To Households (Persons)] DPI = PI Personal (Income) taxes Personal Saving = DPI consumption - interest paid by consumers to businesses personal transfer payments to foreigners. Where:
GNP NFI NNP NI PI DPI : Gross National Product : receipts of factor income from the rest of the world payments of factors income to the rest of the world). : Net national Product : National Income : Personal Income : Disposable personal Income

VI. Nominal and Real GDP:

Nominal GDP Real GDP Fixed Weight procedure Weight GDP Deflator : GDP measured in current prices. : Nominal GDP adjusted for price changes. GDP measured at fixed prices (basic, constant) prices : Procedure that uses weights from given base year : The importance of an item within a group of items : a measure of the overall price level in the economy = Quantities in 2004 * Prices in 2004 = Quantities in 2004 * prices in 2000 (base year) = Nominal GDP in the base year

Note that:
Nominal GDP in 2004 Real GDP 2004 Real GDP

Limitations of the GDP concept as a measure of welfare:

A decrease in crime, an increase in leisure time is not reflected in GDP. But both increase welfare.
5

Some increases in social welfare are associated with a decrease in GDP because less time is spent on producing output, but leisure time increase. Most nonmarket and domestic activities, such as housework and childcare are not counted in GDP. Social ills, pollution.

Underground Economy: Is the part of the economy in which transactions take place and in
which income generated is not reported and therefore not counted in GDP. Thus, GDP is a misleading measure of what the economy produces, because GDP reflects only part of the economic activity. Note that: Per Capita GDP = GDP/ Population Per Capita GNP = GNP / Population DPI = Savings + Spending Saving ratio = Saving / DPI GDP Deflator = Nominal GDP / Real GDP In order to compare a cross economies, we use Gross National Income. GNI is GNP converted into dollars using an average exchange rate over several years adjusted to rates of inflation. GNI per capita = GNI/ population. Inflation rate is the percentage change in GDP deflator

The End

The End